When you have a well-earned reputation in your industry for aggressively cutting costs at the companies you buy, it's hardly shocking that your attempt to acquire a peer with a reputation for making big investments in new products and technologies will be met with pushback.
But as reservations about Broadcom's (AVGO) hostile $79-per-share bid for Qualcomm (QCOM) are aired by everyone from government agencies to smartphone OEMs to mobile carriers, it isn't always clear to what degree the reservations amount to firm opposition to a deal, rather than a means of obtaining guarantees for R&D spending and product support from Broadcom in exchange for their acceptance of its bid.
Qualcomm shares are fell 2.9% on Tuesday after the company published a letter from the Treasury Department indicating the Committee on Foreign Investment in the United States (CFIUS) believes Broadcom's bid warrants an investigation due to potential national security risks. Specifically, CFIUS is worried about Qualcomm losing its leadership role in 5G standards-setting and thus creating an opening for China's Huawei, as well as the future of Qualcomm's decades-old relationship with the Department of Defense.
The letter was shared shortly after Qualcomm announced that its annual meeting, originally set for March 6, had been postponed to April 5 due to an interim order from CFIUS. Broadcom has accused Qualcomm of secretly requesting a CFIUS probe on Jan. 29, and of failing to disclose its action to Broadcom or to its own shareholders.
Qualcomm responded by saying that Broadcom "has been interacting with CFIUS for weeks;" Broadcom says this doesn't change the fact that Qualcomm didn't disclose its late-January actions. Either way, the probe may have bought Qualcomm a temporary reprieve: On Monday, Bloomberg reported that a tally of more than half the votes already cast for Qualcomm's meeting indicates Broadcom is set to win all six of the board seats it's seeking, which in turn would give it control of Qualcomm's board.
Broadcom, it should be noted, also says it expects to finish the process of becoming a U.S.-based company (it's officially a Singapore-based company for now) by the end of fiscal Q2 (ends on May 6), and that the Qualcomm bid won't be under the CFIUS' purview afterwards. In November, Broadcom closed its $5.5 billion acquisition of storage networking hardware leader Brocade Communications (it had also been under CFIUS review), shortly after unveiling plans to relocate to the U.S..
As The Deal's Ron Orol points out, CFIUS' latest action is quite unprecedented, given that no deal has been inked yet between Broadcom and Qualcomm, the latter's annual meeting has been postponed and the fact that Broadcom will soon be a U.S.-based company. Shooting down a takeover bid under such circumstances would be more unprecedented still, especially if Broadcom offers assurances about 5G investments and Department of Defense contracts.
Of course, CFIUS is hardly the only party to air concerns about Broadcom's bid. In December, CNBC reported that Microsoft (MSFT) and Alphabet/Google (GOOGL) had "expressed private concerns" to Qualcomm about a Broadcom deal. The tech giants were said to be on edge about both Broadcom's cost-cutting reputation and the influence that major Broadcom client Apple (AAPL) could have on a deal. A slew of Qualcomm chips can be found inside Google's Pixel phones, and Qualcomm and Microsoft have teamed with PC makers to launch Windows 10-based laptops running on Qualcomm's Snapdragon 835 processor.
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In addition, some major carriers, such as China Mobile, America Movil and NTT DoCoMo, have issued cautious remarks about Broadcom's bid. And in February, Qualcomm said that two unnamed clients that each account for over $1 billion in annual chip revenue have told it that "they are likely to move designs away from Qualcomm" should a deal happen.
Clearly, Broadcom will have a lot of convincing to do regarding its R&D commitments in the event that it inks a deal for Qualcomm. That said, a look at Broadcom's recent history indicates its stance on R&D is more complicated than some deal critics suggest.
Generally, Broadcom seems quite willing to make needed investments in large chip and hardware franchises that have major long-term customers. Examples include its mobile RF and Wi-Fi/Bluetooth chip businesses, its Ethernet switching chip business and its storage controller card and chip business, all of which have been performing quite well over the last few years.
Along the same lines, it's unlikely that Broadcom would gut R&D spending for Qualcomm's core mobile processor and modem business, given its size and blue-chip customer base. Nor would it likely take an axe to the core automotive and embedded micro-controller (MCU) franchises of NXP Semiconductors (NXPI) , which Qualcomm is set to acquire in a $44 billion deal. And provided regulators don't object to Broadcom keeping it, Qualcomm's burgeoning RF chip business should also appeal to the company, given how it can lower Broadcom's heavy RF dependence on Apple and Samsung and improve its 5G positioning.
On the other hand, something like Qualcomm's recently-launched Centriq server CPU line could very well end up on the chopping block, given its R&D needs and Intel's (INTC) historical server CPU dominance. And it's possible that Broadcom will be less enthusiastic than Qualcomm about pursuing Snapdragon design wins for products such as notebooks, wearables and VR/AR headsets. That said, the fact that these efforts can often leverage Qualcomm's mobile processor investments helps keep their costs down.
It's also worth keeping in mind that Broadcom has signaled it plans to restructure Qualcomm's mobile patent-licensing business, which produces over half its operating profit and is embroiled in disputes with Apple and multiple regulators (a dispute with Huawei is reportedly close to being settled). In light of these plans, Broadcom's costly bid for Qualcomm is unlikely to pay off unless Qualcomm's chip business is healthy and growing in the years to come. At least outside of the parts that would be sold off due to antitrust issue or poor growth prospects (for example, Qualcomm's Wi-Fi chip business or NXP's smart card MCU business).
Meanwhile, Broadcom's willingness to provide royalty discounts to Qualcomm licensees could do much to win over smartphone OEMs -- particularly if it makes major chip R&D commitments along the way.
In a nutshell, a lot remains in flux about how regulators and various mobile industry players perceive and react to Broadcom's bid for Qualcomm. It's perfectly logical that many of these parties have concerns about a deal. But that doesn't necessarily mean that firm decisions to oppose the deal have been made.